The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Friday, July 19, 2013

Is Wall Street winning or because of its high profits losing the long-war against regulation

Approximately one month ago, in her Guardian column, Heidi Moore described why Wall Street is winning the long-war against regulation.

Feeble as it was, Dodd-Frank was a high point of reining in abuses. Thanks to financial lobbying, it's business as usual.

Today, in his NY Times column, Peter Eavis describes why Wall Street's high profits set them up to lose the long-war against regulation.

In recent weeks, the Treasury Department, senior regulators and members of Congress have stepped up efforts intended to make the largest banks safer.

The banks have warned that more regulation could undermine their ability to compete and curtail the amount of money they have to lend, but the strong earnings that came out over the last week could undercut their argument.

Which view is right?

Ms. Moore described how Wall Street wins the long-term war against regulation.

It will surprise no cynic that there is a financial connection between the members of Congress who approve these measures and the industry they are supposed to regulate....

Think of derivatives – these complex securities that render ignorant and bewildered even the CEOs of the finance firms that engineer them – and think about whether a newcomer has a chance against the slick bankers and lobbyists armed with intimidating jargon.

No matter how strong the personality, knowledge matters, and it takes years to understand the Wall Street fast-talking game....

All of this is part of the process of killing off the one flailing, pathetic attempt at financial reform: the Dodd-Frank Act.

Dodd-Frank, bloated and vague from the beginning, was never a threat to Wall Street.

Big banks thought they could wait out the outrage, then start undermining the intent of the law.

They were right, this time.

Mr. Eavis counters.

The most pressing concern for banks is a relatively tough new rule that regulators proposed last week that could force banks to build up more capital, the financial buffer they maintain to absorb losses.

Relatively tough might be overstating the new rule. Many regulators, like the FDIC's Thomas Hoenig, and Economists, like Anat Admati, would like to see rules that require twice the amount the regulators proposed last month.

By setting the proposed level of bank capital where the regulators set it, the banks have already effectively won when it comes to capital regulation.

But the banks did not demonstrate any difficulty in meeting the proposed rules, and the banks now appear to have fewer allies in Washington than at any time since the financial crisis.

This was highlighted on Wednesday when the Treasury secretary, Jacob J. Lew, effectively issued an ultimatum to Wall Street, calling for the swift adoption of rules introduced through the Dodd-Frank financial overhaul law, which Congress passed in 2010....

“If we get to the end of this year, and cannot, with an honest, straight face, say that we’ve ended ‘too big to fail,’ we’re going to have to look at other options because the policy of Dodd-Frank and the policy of the administration is to end ‘too big to fail,’ ” Mr. Lew said....

In Congress on Thursday, Ben S. Bernanke, the Federal Reserve chairman,... said that if the measures already planned did not remove the risks posed by large banks, “additional steps would be appropriate.”

Still, some analysts remain skeptical that the Fed and the Treasury would really lend their weight to the sort of aggressive measures some lawmakers are contemplating. The recent comments may be an attempt to gain some political benefit from looking tough on the banks.

And the remarks may be aimed at reducing any momentum that the more draconian pieces of bank legislation are gaining in the Senate....

Still, the stronger words from government officials could shift the balance of power away from the banking industry.

The resurgence in bank profits appears to have been an important factor in persuading regulators to do more....

“The regulators are doing this because they can,” Michael Mayo, a banking analyst at CLSA, said. “And they can at this time of relative stability.”....

Excuse me, but the argument that stability was needed before the banks and the financial system could be reformed is pure and utter garbage.

By late 2008, governments around the globe had put the financial system on life support. This support was the equivalent of putting a patient on a heart/lung machine so that the patient's heart can be operated on.

While the financial system was on life support it would have been easy to pass and implement the necessary changes to fix the financial system and end Too Big to Fail.

Global policy makers and financial regulators did not do so. They couldn't even be bother with taking the time to set up the equivalent of a Pecora Commission to discover what caused the crisis in the first place, opacity.

Instead, they rolled out the Dodd-Frank Act which was effectively written by and for the banks by the banks' lobbyists.

Still, Mr. Mayo and others question how healthy the banks are....

Mr. Mayo and others are going to continue questioning how healthy the banks are until such time as the banks are required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Without this level of disclosure, there is no telling what risks and losses are hidden on and off the banks' balance sheets.

Still, some banking experts think the banks are bluffing when they say more regulation could hamper lending.

“They can’t see that it is in their long-term interests to have a credible regulatory process,” Ms. Bair said.

The banks understand that they have already captured the regulatory process.

The only way for the regulators to re-establish any credibility is by giving up their monopoly on all the useful, relevant information about banks and requiring the banks to provide ultra transparency.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.